Strategic Advantages of Backward Integration

Essay text:

De-Integration ? Whether vertical integration is a viable strategic option depends on its ? Ability to lower cost, build expertise, increase differentiation, or enhance performance of strategy-critical activities ? Impact on investment cost, flexibility, and administrative overhead ? Contribution to enhancing a firm's competitiveness Many companies are finding that de-integrating value chain activities is a more flexible, economic strategic option! Outsourcing Strategies ? Concept: ? Outsourcing involves withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activities When Does Outsourcing Make Strategic Sense? ? Activity can be performed better or more cheaply by outside specialists ? Activity is not crucial to achieve a sustainable competitive advantage ? Risk exposure to changing technology and/or changing buyer preferences is reduced ? Operations are streamlined to ? Cut cycle time ? Speed decision-making ? Reduce coordination costs ? Firm can concentrate on "core" value chain activities that best suit its resource strengths Strategic Advantages of Outsourcing ? Improves firm's ability to obtain high quality and/or cheaper components or services ? Improves firm's ability to innovate by interacting with "best-in-world" suppliers ? Enhances firm's flexibility should customer needs and market conditions suddenly shift ? Increases firm's ability to assemble diverse kinds of expertise speedily and efficiently ? Allows firm to concentrate its resources on performing those activities internally which it can perform better than outsiders Pitfalls of Outsourcing ? Farming out too many or the wrong activities, thus ? Hollowing out capabilities ? Losing touch with activities and expertise that determine overall longterm success